Fearful? These Volatility ETN Traders Aren’t

By Brendan Conway

Mr. Market may be worried about stock valuations, the Federal Reserve, instability in emerging markets, and so forth. But not the users of exchange-traded volatility notes.

Money is flowing quickly into one of those complex tools, and it’s no accident that it’s the one risk-takers use to bet on a calmer market.

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The calm after the storm

Nick Taborek and Callie Bost of Bloomberg News have the story on VelocityShares Daily Inverse VIX Short-Term ETN (XIV), which has slumped nearly 25% in the new year, including 4% on Wednesday. This one and the similarly constructed ProShares Short VIX Short-Term Futures ETF (SVXY) tend to rise when bullish sentiment predominates, as they did during 2013. Last year, each trading tool gained more than 100%.

High risk, high potential reward, and large potential losses — lately, scratch the “potential.” The carnage just looks like a buying opportunity to many, though. From Bloomberg:

About $196 million was added last week to the VelocityShares Daily Inverse VIX Short-Term ETN, which rises in value as swings decline, the most since its debut in November 2010, according to data compiled by Bloomberg. The ETN, known by its ticker XIV, may be starting to pay off after the U.S. volatility benchmark fell the most in six weeks yesterday amid a rally in stocks on higher corporate earnings. …

Investors have also withdrawn money from a VIX fund that rises with higher volatility. About $388 million was pulled from the iPath S&P 500 VIX Short-Term Futures ETN (VXX) last week, the most since March, data compiled by Bloomberg show.

Volume in the inverse VIX note has soared even as the value of the security dropped. About 46 million notes changed hands on Feb. 3, the second-highest daily total since it began trading.

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There are 3 comments

FEBRUARY 5, 2014 12:16 P.M.

Sal wrote:

Seems like a lot of dumb money flowing right now

FEBRUARY 6, 2014 10:51 A.M.

jeff wrote:

Margin debt has been leveraged up to all time record highs for the past year. It's not dumb money flowing Sal. It's dumb promises that will be broken when the jig is up. Hell the us government writes itself an IOU to use as collateral for a loan to buy IOU's to sell for money. Seems to me the dumbest of the dumb money are the bond market traders who haven't demanded their IOU's be turned to cash while they still can.

FEBRUARY 15, 2014 10:45 P.M.

Paul Westford wrote:

The XIV buyers of today are the Las Vegas Waitress Condo Flippers of 2005 reborn.

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